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Sovereign ratings, macroeconomic dynamics, and fiscal policy. Interactions within a stock flow consistent framework

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  • Stefanos Ioannou

Abstract

Operating in the context of deregulated financial markets, credit rating agencies do not only ‘provide an opinion’, but also affect macroeconomic dynamics. By utilizing a two†country stock flow consistent model that provides a representation of the Eurozone, the paper connects the movements of sovereign ratings with the dynamics of the financial market and the constraints on fiscal policy. With endogenous fiscal expenditure and an endogenous credit rating mechanism the model shows how following a recessionary shock, a rating downgrade can influence the financial constraints that surround a government, pushing it toward fiscal austerity and thereby deepening the already ongoing recession.

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  • Stefanos Ioannou, 2018. "Sovereign ratings, macroeconomic dynamics, and fiscal policy. Interactions within a stock flow consistent framework," Metroeconomica, Wiley Blackwell, vol. 69(1), pages 151-177, February.
    • Handle: RePEc:bla:metroe:v:69:y:2018:i:1:p:151-177
    DOI: 10.1111/meca.12174
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    Cited by:

    1. Vincent Duwicquet & Jacques Mazier & Jamel Saadaoui, 2018. "Dealing with the consequences of exchange rate misalignments for macroeconomic adjustments in the EMU," Metroeconomica, Wiley Blackwell, vol. 69(4), pages 737-767, November.
    2. Reale, Jessica, 2024. "Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach," Journal of Economic Dynamics and Control, Elsevier, vol. 160(C).
    3. Guneren Genc, Elif & Deniz Basar, Ozlem, 2019. "Comparison of Country Ratings of Credit Rating Agencies with MOORA Method," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 10(2), pages 391-404, April.
    4. Emilio Carnevali, 2021. "Price mechanism and endogenous productivity in an open economy stock‐flow consistent model," Metroeconomica, Wiley Blackwell, vol. 72(1), pages 22-56, February.
    5. Jessica Reale, 2023. "Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach," Papers 2306.05860, arXiv.org.

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